When, not just how much.
Financial trouble for many people — people with modest paychecks and homes — may be less about how much money they have than it is about when they need money to pay their debts.
Simply put, the amount of money coming in may not be steady. And it may not be predictable. And all you need is a gap between expenses and income to have a crisis.
A newly released, year-long study of more than 200 households showed that "cash flow matters just as much as income and assets."
The struggle that many households face isn’t about having enough money over the course of a year — at least not just about that. It’s about “whether they have enough money on hand this month, even this week,” wrote the authors of a paper about the study.
The problem is about a sudden, unexpected expense or perhaps, a shortfall in pay, according to Jonathan Morduch, a professor of public policy and economics at the New York University, and Rachel Schneider, a senior vice president at the Center for Financial Services Innovation.
The two are both investigators for the U.S. Financial Diaries project.
In their paper, posted today on Shelterforce, the reality of many Americans in "financial unsteadiness."
They argue that the government in some ways offers help to bolster incomes or to provide housing subsidies, but what many people need is some way to bridge temporary gaps between income and expenses. In other words: problems in cash flow.
Contrary to some assumptions, struggling Americans do try to save, but their savings are mostly for the short-term, not the long term, they write.
For the U.S. Financial Diaries project, the authors followed several hundred lower- and middle-income working American households. Funding for the project came from the Citi Foundation, the Ford Foundation and Omidyar Network.
Millions of Americans are faced with difficult cash flow dilemmas, the two write: "What if the financial choice you have to make isn't which IRA offers the best investment choices, but which pawn shop offers a better deal when you need cash to pay the electric bill and keep the lights from going out? When do you pick up extra hours at work to have a bit of extra cash?"
Past studies of foreclosure have often concluded that the most common causes were sudden cash flow problems caused by crises like health expenses, layoffs and divorce.
Sometimes your financial future comes down to a high-stakes bet, they say. “Is it better to pay down your credit card balance or build up the rainy day fund?”
About the Author
